INCOME FROM HOUSE PROPERTY 4.

117

UNIT – 2 : INCOME FROM HOUSE PROPERTY

LEARNING OUTCOMES

After studying this chapter, you would be able to-

 comprehend when income is chargeable under the head
“Income from house property”;
 appreciate the meaning and tax treatment of composite rent;
 determine annual value of different categories of house
property;
 compute income from house property for different
categories of house property;
 comprehend and apply the tax treatment on recovery of
unrealized rent and arrears of rent;
 compute income from co-owned property.

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 4.118 INCOME TAX LAW

2.1 CHARGEABILITY [SECTION 22]

(i) The process of computation of income under the head “Income from house
property” starts with the determination of annual value of the property. The
concept of annual value and the method of determination is laid down in
section 23.
(ii) The annual value of any property comprising of buildings or lands
appurtenant thereto of which the assessee is the owner is chargeable to tax
under the head “Income from house property”.
Exceptions: Annual value of the following properties are chargeable under the
head “Profits and gains of business or profession” -
(i) Portions of property occupied by the assessee for the purpose of any business
or profession carried on by him
(ii) Properties of an assessee engaged in the business of letting out of properties.

2.2 CONDITIONS FOR CHARGEABILITY

(i) Property should consist of any building or land appurtenant thereto.
(a) Buildings include not only residential buildings, but also factory
buildings, offices, shops, godowns and other commercial premises.
(b) Land appurtenant means land connected with the building like garden,
garage etc.

It may be noted that Income from letting out of vacant land is, however, taxable
under the head “Income from other sources” or “Profits and gains from business
or profession”, as the case may be.

(ii) Assessee must be the owner of the property

(a) Owner is the person who is entitled to receive income from the property
in his own right.
(b) The requirement of registration of the sale deed is not warranted.
(c) Ownership includes both free-hold and lease-hold rights.
(d) Ownership includes deemed ownership (discussed later in point 2.11)
(e) The person who owns the building need not also be the owner of the
land upon which it stands.

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 INCOME FROM HOUSE PROPERTY 4.119

(f) The assessee must be the owner of the house property during the
previous year. It is not material whether he is the owner in the
assessment year.
(g) If the title of the ownership of the property is under dispute in a court
of law, the decision as to who will be the owner chargeable to income-
tax under section 22 will be of the Income-tax Department till the court
gives its decision to the suit filed in respect of such property.

However, in case of recovery of unrealized rent and arrears of rent, ownership of

that property is not relevant. (discussed later in point 2.9)

(iii) Use of property

The property may be used for any purpose, but it should not be used by the
owner for the purpose of any business or profession carried on by him, the
profit of which is chargeable to tax.
The income earned by an assessee engaged in the business of letting out of
properties on rent would be taxable as business income 1.
(iv) Property held as stock-in-trade etc.
Annual value of house property will be charged under the head “Income from
house property”, where it is held by the assessee as stock-in-trade of a
business also.
However, the annual value of property being held as stock in trade would be
treated as NIL for a period of two years from the end of the financial year in
which certificate of completion of construction of the property is obtained
from the competent authority, if such property is not let-out during such
period [Section 23(5)].

2.3 COMPOSITE RENT

(i) Meaning of composite rent: The owner of a property may sometimes
receive rent in respect of building as well as –
(1) other assets like say, furniture, plant and machinery.
(2) for different services provided in the building, for e.g., –
(a) Lifts;

1
Supreme Court ruling in Rayala Corporation (P) Ltd. v. Asstt. CIT (2016) 386 ITR 500

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 4.120 INCOME TAX LAW

(b) Security;
(c) Power backup;
The amount so received is known as “composite rent”.
(ii) Tax treatment of composite rent
Where composite rent includes rent of building and charges for different
services (lifts, security etc.), the composite rent is has to be split up in the
following manner-
(a) the sum attributable to use of property is to be assessed under section
22 as income from house property;
(b) the sum attributable to use of services is to be charged to tax under the
head “Profits and gains of business or profession” or under the head
“Income from other sources”, as the case may be.
(iii) Manner of splitting up
If let out building and other assets are inseparable
Where composite rent is received from letting out of building and other assets
(like furniture) and the two lettings are not separable i.e. the other party does
not accept letting out of building without other assets, then the rent is taxable
either as business income or income from other sources, the case may be.
This is applicable even if sum receivable for the two lettings is fixed
separately.
If let out building and other assets are separable
Where composite rent is received from letting out of building and other
assets and the two lettings are separable i.e. letting out of one is acceptable
to the other party without letting out of the other, then
(a) income from letting out of building is taxable under “Income from
house property”;
(b) Income from letting out of other assets is taxable under “Profits and
gains of business or profession” or “Income from other sources”, as the
case may be.
This is applicable even if a composite rent is received by the assessee from
his tenant for the two lettings.

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2.4 INCOME FROM HOUSE PROPERTY SITUATED

OUTSIDE INDIA
(i) In case of a resident in India (resident and ordinarily resident in case of
individuals and HUF), income from house property situated outside India is
taxable, whether such income is brought into India or not.
(ii) In case of a non-resident or resident but not ordinarily resident in India,
income from a property situated outside India is taxable only if it is received
in India.

2.5 DETERMINATION OF ANNUAL VALUE

[SECTION 23]
Municipal
Determinatio tax paid by
n of Gross the owner Net Annual
Annual Value during the Value (NAV)
(GAV) previous
year

(i) Determination of annual value for different types of house properties

(1) Where the property is let out throughout the previous year [Section
23(1)(a)/(b)]
Where the property is let out for the whole year, then the GAV would
be the higher of –
(a) Expected Rent (ER) and
(b) Actual rent received or receivable during the year
♦ The Expected Rent (ER) is the higher of fair rent (FR) and municipal
value (MV), but restricted to standard rent (SR).
♦ For example, let us say the higher of FR and MV is X. Then ER =
SR, if X>SR. However, if X<SR, ER = X.
♦ Expected Rent (ER) as per section 23(1)(a) cannot exceed standard
rent (SR) but it can be lower than standard rent, in a case where
standard rent is more than the higher of MV and FR.

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 4.122 INCOME TAX LAW

♦ Municipal value is the value determined by the municipal

authorities for levying municipal taxes on house property.
♦ Fair rent means rent which similar property in the same locality
would fetch.
♦ The standard rent (SR) is fixed by the Rent Control Act.
From the GAV computed above, municipal taxes paid by the owner during
the previous year are to be deducted to arrive at the NAV.
ILLUSTRATION 1
Jayashree owns five houses in India, all of which are let-out. Compute the GAV
of each house from the information given below –

Particulars House House House House House

I II III IV V
(` ) (` ) (` ) (` ) (` )
Municipal Value 80,000 55,000 65,000 24,000 80,000
Fair Rent 90,000 60,000 65,000 25,000 75,000
Standard Rent N.A. 75,000 58,000 N.A. 78,000
Actual rent received/ 72,000 72,000 60,000 30,000 72,000
receivable
SOLUTION
As per section 23(1), Gross Annual Value (GAV) is the higher of Expected rent
and actual rent received. Expected rent is higher of municipal value and fair
rent but restricted to standard rent.
Computation of GAV of each house owned by Jayashree
Particulars House House House House House
I II III IV V
(`) (`) (`) (`) (`)
(i) Municipal value 80,000 55,000 65,000 24,000 80,000
(ii) Fair rent 90,000 60,000 65,000 25,000 75,000
(iii) Higher of (i) & (ii) 90,000 60,000 65,000 25,000 80,000
(iv) Standard rent N.A. 75,000 58,000 N.A. 78,000
(v) Expected rent 90,000 60,000 58,000 25,000 78,000
[Lower of (iii) &
(iv)]

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 INCOME FROM HOUSE PROPERTY 4.123

(vi) Actual rent 72,000 72,000 60,000 30,000 72,000

received/receivable
GAV [Higher of 90,000 72,000 60,000 30,000 78,000
(v) & (vi)]
(2) Where let out property is vacant for part of the year
[Section 23(1)(c)]
Where let out property is vacant for part of the year and owing to
vacancy, the actual rent is lower than the ER, then the actual rent
received or receivable will be the GAV of the property.
(3) In case of self-occupied property or unoccupied property
[Section 23(2)]
(a) Where the property is self-occupied for own residence or
unoccupied throughout the previous year, its Annual Value will
be Nil, provided no other benefit is derived by the owner from
such property.

The expression “Unoccupied property” refers to a property

which cannot be occupied by the owner by reason of his
employment, business or profession at a different place and he
resides at such other place in a building not belonging to him.
(b) The benefit of “Nil” Annual Value is available only for upto two
self-occupied or unoccupied house properties i.e. for either one
house property or two house properties.
(c) The benefit of “Nil” Annual Value in respect of upto two self-
occupied house properties is available only to an individual/ HUF.
(c) No deduction for municipal taxes is allowed in respect of such
property/properties as annual value means value determined after
deduction of municipal taxes.
(4) Where a house property is let-out for part of the year and self-
occupied for part of the year [Section 23(3)]
(a) If a single unit of a property is self-occupied for part of the year
and let-out for the remaining part of the year, then the ER for the
whole year shall be taken into account for determining the GAV.
(b) The ER for the whole year shall be compared with the actual rent for the
let out period and whichever is higher shall be adopted as the GAV.

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 4.124 INCOME TAX LAW

(c) However, municipal tax for the whole year is allowed as deduction
provided it is paid by the owner during the previous year.
(5) In case of deemed to be let out property [Section 23(4)]
(a) Where the assessee owns more than two properties for self-
occupation, then the income from any two properties, at the
option of the assessee, shall be computed under the self-occupied
property category and their annual value will be nil.
(b) The other self-occupied/unoccupied properties shall be treated as
“deemed let out properties”.
(c) This option can be changed year after year in a manner beneficial
to the assessee.
(d) In case of deemed let-out property, the ER shall be taken as the GAV.
(e) The question of considering actual rent received/receivable does
not arise. Consequently, no adjustment is necessary on account of
property remaining vacant or unrealized rent.
(f) Municipal taxes actually paid by the owner during the previous
year, in respect of the deemed let out properties, can be claimed
as deduction.
(6) In case of a house property held as stock-in-trade [Section 23(5)]
(a) In some cases, property consisting of any buildings or lands
appurtenant thereto may be held as stock-in-trade, and the whole
or any part of the property may not be let out during the whole
or any part of the previous year.
(b) In such cases, the annual value of such property or part of the
property shall be Nil.
(c) This benefit would be available for the period upto two years
from the end of the financial year in which certificate of
completion of construction of the property is obtained from the
competent authority.
(7) In case of a house property, a portion let out and a portion self-
occupied
(a) Income from any portion or part of a property which is let out
shall be computed separately under the “let out property”

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 INCOME FROM HOUSE PROPERTY 4.125

category and the other portion or part which is self-occupied shall

be computed under the “self-occupied property” category.
(b) There is no need to treat the whole property as a single unit for
computation of income from house property.
(c) Municipal valuation/fair rent/standard rent, if not given
separately, shall be apportioned between the let-out portion and
self-occupied portion either on plinth area or built-up floor space
or on such other reasonable basis.
(d) Property taxes, if given on a consolidated basis, can be bifurcated
as attributable to each portion or floor or on a reasonable basis.

Notional income instead of real income

Thus, under this head of income, there are circumstances where notional
income is charged to tax instead of real income. For example –
♦ Where the assessee owns more than two house properties for the
purpose of self-occupation, the annual value of any two of those
properties, at the option of the assessee, will be nil and the other
properties are deemed to be let-out and income has to be computed
on a notional basis by taking the Expected Rent (ER) as the GAV.
♦ In the case of property let-out throughout the previous year, if the
Expected Rent (ER) exceeds the actual rent received or receivable, then
ER is taken as the GAV.
♦ In the case of let-out property which is vacant for part of the year, if the
actual rent received or receivable for let out period is less than the
Expected Rent (ER) for whole year not owing to vacancy, then ER for
whole year is taken as the GAV.
♦ In case of a house property held as stock-in-trade by assessee (which is
not let out), income has to be computed on a notional basis by taking
the Expected Rent (ER) as the GAV after 2 years from the end of the
financial year in which certificate of completion of construction of the
property is obtained from the competent authority.

(ii) Treatment of unrealised rent [Explanation below section 23(1)]

(1) The Actual rent received/receivable should not include any amount of
rent which is not capable of being realised.

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 4.126 INCOME TAX LAW

(2) However, the conditions prescribed in Rule 4 should be satisfied. They are –
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated, or steps have been taken to
compel him to vacate the property;

(c) the defaulting tenant is not in occupation of any other property

of the assessee;
(d) the assessee has taken all reasonable steps to institute legal
proceedings for the recovery of the unpaid rent or satisfies the
Assessing Officer that legal proceedings would be useless.
(iii) Property taxes (Municipal taxes)
(1) Property taxes are allowable as deduction from the GAV subject to the
following two conditions:
(a) It should be borne by the assessee (owner); and
(b) It should be actually paid during the previous year.
(2) If property taxes levied by a local authority for a particular previous year
are not paid during that year, no deduction shall be allowed in the
computation of income from house property for that year.
(3) However, if in any subsequent year, the arrears are paid, then, the
amount so paid is allowed as deduction in computation of income from
house property for that year.
(4) Thus, we find that irrespective of the previous year in which the liability
to pay such taxes arises according to the method of accounting
regularly employed by the owner, the deduction in respect of such taxes
will be allowed only in the year of actual payment by the owner.
(5) In case of property situated outside India, taxes levied by local authority
of the country in which the property is situated is deductible 2.
(6) In respect of self-occupied/unoccupied house property/properties for
which “Nil” Annual Value benefit is claimed, deduction of municipal
taxes paid is not allowable.

2
CIT v. R. Venugopala Reddiar (1965) 58 ITR 439 (Mad)

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ILLUSTRATION 2
Rajesh, a British national, is a resident and ordinarily resident in India during the P.Y.
2020-21. He owns a house in London, which he has let out at £ 10,000 p.m. The
municipal taxes paid to the Municipal Corporation of London is £ 8,000 during the
P.Y. 2020-21. The value of one £ in Indian rupee to be taken at ` 95. Compute
Rajesh’s Net Annual Value of the property for the A.Y. 2021-22.
SOLUTION
For the P.Y. 2020-21, Mr. Rajesh, a British national, is resident and ordinarily resident
in India. Therefore, income received by him by way of rent of the house property
located in London is to be included in the total income in India. Municipal taxes
paid in London is be to allowed as deduction from the gross annual value.
Computation of Net Annual Value of the property of Mr. Rajesh for
A.Y. 2021-22

Particulars `
Gross Annual Value (£ 10,000 × 12 × 95) 1,14,00,000
Less: Municipal taxes paid (£ 8,000× 95) 7,60,000
Net Annual Value (NAV) 1,06,40,000

2.6 DEDUCTIONS FROM ANNUAL VALUE

[SECTION 24]
(i) There are two deductions from annual value. They are –
(1) 30% of NAV; and
(2) Interest on borrowed capital
(1) 30% of NAV is allowed as deduction under section 24(a)
(a) This is a flat deduction and is allowed irrespective of the actual
expenditure incurred.

(b) The assessee will not be entitled to deduction of 30%, in the

following cases, as the annual value itself is nil.
(i) In case of self-occupied properties or

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 4.128 INCOME TAX LAW

(ii) In case of property held as stock-in-trade and the whole or any

part of the property is not let out during the whole or any part of
the previous year, upto 2 years from the end of the financial year
in which certificate of completion of construction of the property
is obtained from the competent authority.
(2) Interest on borrowed capital is allowed as deduction u/s 24(b)
Interest payable on loans borrowed for the purpose of acquisition,
construction, repairs, renewal or reconstruction can be claimed as
deduction.
Interest payable on a fresh loan taken to repay the original loan raised
earlier for the aforesaid purposes is also admissible as a deduction.
Interest for pre-construction period:
Pre-construction period is the period prior to the previous year in which
property is acquired or construction is completed.
Interest payable on borrowed capital for the period prior to the previous
year in which the property has been acquired or constructed (Pre-
construction interest) as reduced by any part thereof allowed as
deduction under any other provision of the Act, can be claimed as
deduction over a period of 5 years in equal annual installments
commencing from the year of acquisition or completion of construction.
Interest for the year in which construction is completed/ property
is acquired:
Interest relating to the year of completion of construction/ acquisition
of property can be fully claimed in that year irrespective of the date of
completion/ acquisition.
(ii) Deduction in respect of self-occupied or unoccupied property where
annual value is nil
(1) In this case, the assessee will be allowed a deduction on account of
interest (including 1/5th of the accumulated interest of pre-
construction period) as under –

S. Conditions Amount of Deduction

No.
(a) Loan borrowed before 1.4.99: Actual interest payable
Where the property has been in aggregate for one or

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acquired, constructed, repaired, two self-occupied

renewed or reconstructed with properties, subject to
borrowed capital before 1.4.99. maximum of ` 30,000.
(b) Loan borrowed on or after 1.4.99:
(i) Where the property is acquired Actual interest payable
or constructed with capital in aggregate for one or
borrowed on or after 1.4.99 and two self-occupied
such acquisition or construction properties, subject to
is completed within 5 years maximum of ` 2,00,000,
from the end of the financial if certificate mentioned
year in which the capital was in (2) below is obtained.
borrowed.
(ii) Where the property is Actual interest payable
repaired, renewed or in aggregate for one or
reconstructed with capital two self-occupied
borrowed on or after 1.4.99. properties, subject to a
maximum of ` 30,000.
However, the total interest deduction under (a) and (b) cannot
exceed ` 2,00,000.
ILLUSTRATION 3
Mr. Manas owns two house properties one at Bombay, wherein his family
resides and the other at Delhi, which is unoccupied. He lives in
Chandigarh for his employment purposes in a rented house. For
acquisition of house property at Bombay, he has taken a loan of ` 30
lakh@10% p.a. on 1.4.2019. He has not repaid any amount so far. In
respect of house property at Delhi, he has taken a loan of ` 5 lakh@11%
p.a. on 1.10.2019 towards repairs. Compute the deduction which would
be available to him under section 24(b) for A.Y.2021-22 in respect of
interest payable on such loan.
SOLUTION
Mr. Manas can claim benefit of Nil Annual Value in respect of his house
property at Bombay and Delhi, since no benefit is derived by him from
such properties, and he cannot occupy such properties due to reason
of his employment at Chandigarh, where he lives in a rented house.

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Computation of deduction u/s 24(b) for A.Y.2021-22

Particulars `
I Interest on loan taken for acquisition of residential
house property at Bombay
30,00,000 x 10% = ` 3,00,000
Restricted to ` 2,00,000 2,00,000
II Interest on loan taken for repair of residential house
property at Delhi
` 5,00,000 x 11% = ` 55,000
Restricted to ` 30,000 30,000
Total interest 2,30,000
Deduction under section 24(b) in respect of (I) and (II) 2,00,000
above to be restricted to
(2) Certificate to be furnished: For the purpose of claiming deduction of
` 2,00,000 as per (b)(i) in the table given above, the assessee should
furnish a certificate from the person to whom any interest is payable on
the capital borrowed, specifying the amount of interest payable by the
assessee for the purpose of such acquisition or construction of the
property or conversion of the whole or any part of the capital borrowed
which remains to be repaid as a new loan.
Important points:
(1) The ceiling limit would not apply to let-out/deemed let-out property: The
ceiling prescribed for self-occupied property as above in respect of interest on
loan borrowed does not apply to a let out/ deemed let-out property.
(2) Interest allowable on accrual basis: Deduction under section 24(b) for
interest is available on accrual basis. Therefore interest accrued but not paid
during the year can also be claimed as deduction.
(3) Unpaid purchase price would be considered as capital borrowed: Where
a buyer enters into an arrangement with a seller to pay the sale price in
installments along with interest due thereon, the seller becomes the lender
in relation to the unpaid purchase price and the buyer becomes the borrower.
In such a case, unpaid purchase price can be treated as capital borrowed for
acquiring property and interest paid thereon can be allowed as deduction
under section 24.

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 INCOME FROM HOUSE PROPERTY 4.131

(4) Interest on unpaid interest is not deductible.

Deductions from Net Annual Value: At a Glance
Deductions allowed from
NAV

Let out/ Self occupied

deemed let property/
out properties
property
Interest on
Interest borrowed capital
Standard on u/s 24(b)
deduction borrowed
u/s 24(a) capital where loan is where loan is taken
u/s 24(b) taken for repair, for acquisition or
30% of renewal or construction of
NAV Fully reconstruction of house property
Allowed house property

If loan is If loan is
Maximum
taken before taken on or
` 30,000 in
1.4.99 after 1.4.99
toto for one
or two self
occupied Acquisition or
properties construction
completed within 5
years from the end
of the FY in which
the capital was
borrowed
+
Certificate from
lender specifying
interest payable

No Yes

Maximum Maximum
` 30,000 in toto ` 2,00,000 in toto
for one or two for one or two
self occupied self occupied
properties properties

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2.7 COMPUTATION OF “INCOME FROM HOUSE

PROPERTY” FOR DIFFERENT CATEGORIES OF
PROPERTY
(I) PROPERTY LET OUT THROUGHOUT THE PREVIOUS YEAR

Particulars Amount
Computation of GAV
Step 1 Compute ER
ER = Higher of MV and FR, but restricted to SR
Step 2 Compute Actual rent received/receivable
Actual rent received/receivable less unrealized rent as
per Rule 4 [See Note below for alternate view]
Step 3 Compare ER and Actual rent received/receivable
Step 4 GAV is the higher of ER and Actual rent
received/receivable
Gross Annual Value (GAV) A
Less: Municipal taxes (paid by the owner during the previous B
year)
Net Annual Value (NAV) = (A-B) C
Less: Deductions u/s 24
(a) 30% of NAV D
(b) Interest on borrowed capital (actual
without any ceiling limit) E F
Income from house property (C-F) G

Note - The income-tax returns, however, permit deduction of unrealized rent from
gross annual value. If this view is taken, the unrealized rent should be deducted only
after computing gross annual value.
ILLUSTRATION 4
Anirudh has a property whose municipal valuation is ` 1,30,000 p.a. The fair rent is
` 1,10,000 p.a. and the standard rent fixed by the Rent Control Act is ` 1,20,000 p.a. The
property was let out for a rent of ` 11,000 p.m. throughout the previous year. Unrealised

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rent was ` 11,000 and all conditions prescribed by Rule 4 are satisfied. He paid municipal
taxes @10% of municipal valuation. Interest on borrowed capital was ` 40,000 for the
year. Compute his income from house property for A.Y.2021-22.
SOLUTION
Computation of Income from house property of Mr. Anirudh for A.Y. 2021-22

Particulars Amount in `
Computation of GAV
Step 1 Compute ER
ER = Higher of MV of ` 1,30,000 p.a. and FR of 1,20,000
` 1,10,000 p.a., but restricted to SR of
` 1,20,000 p.a.
Step 2 Compute actual rent received/receivable
Actual rent received/ receivable less unrealized 1,21,000
rent as per Rule 4 = ` 1,32,000 - ` 11,000
Step 3 Compare ER of ` 1,20,000 and Actual rent
received/receivable of ` 1,21,000

Step 4 GAV is the higher of ER and Actual rent 1,21,000

received/receivable
Gross Annual Value (GAV) 1,21,000
Less: Municipal taxes (paid by the owner during the
previous year) = 10% of ` 1,30,000 13,000
Net Annual Value (NAV) 1,08,000
Less: Deductions under section 24
(a) 30% of NAV 32,400
(b) Interest on borrowed capital (actual
without any ceiling limit) 40,000 72,400
Income from house property 35,600

Note – Alternatively, if as per income-tax returns, unrealized rent is deducted from

GAV, then GAV would be ` 1,32,000, being higher of expected rent of ` 1,20,000 and
actual rent of ` 1,32,000. Thereafter, unrealized rent of ` 11,000 and municipal taxes
of ` 13,000 would be deducted from GAV of ` 1,32,000 to arrive at the NAV of
` 1,08,000.

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 4.134 INCOME TAX LAW

(II) LET OUT PROPERTY VACANT FOR PART OF THE YEAR

Particulars Amount
Computation of GAV
Step 1 Compute ER
ER = Higher of MV and FR, but restricted to SR
Step 2 Compute Actual rent received/ receivable
Actual rent received/receivable for let out period less
unrealized rent as per Rule 4 [See Note below for alternate
view]
Step 3 Compare ER and Actual rent received/ receivable
computed for the let-out period
Step 4 If Actual rent is lower than ER owing to vacancy, then Actual
rent is the GAV.
If Actual rent is lower than ER due to other reasons, then
ER is the GAV.
However, in spite of vacancy, if the actual rent is higher
than the ER, then Actual rent is the GAV.
Gross Annual Value (GAV) A
Less: Municipal taxes (paid by the owner during the previous year) B
Net Annual Value (NAV) = (A-B) C
Less: Deductions under section 24
(a) 30% of NAV D
(b) Interest on borrowed capital (actual without any
ceiling limit) E F
Income from house property (C-F) G

Note - The income-tax returns, however, permit deduction of unrealized rent from
gross annual value. If this view is taken, the unrealized rent should be deducted only
after computing gross annual value.
ILLUSTRATION 5
Ganesh has a property whose municipal valuation is ` 2,50,000 p.a. The fair rent is
` 2,00,000 p.a. and the standard rent fixed by the Rent Control Act is ` 2,10,000 p.a.
The property was let out for a rent of ` 20,000 p.m. However, the tenant vacated the
property on 31.1.2021. Unrealised rent was ` 20,000 and all conditions prescribed by
Rule 4 are satisfied. He paid municipal taxes @8% of municipal valuation. Interest

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 INCOME FROM HOUSE PROPERTY 4.135

on borrowed capital was ` 65,000 for the year. Compute the income from house
property of Ganesh for A.Y. 2021-22.
SOLUTION
Computation of income from house property of Ganesh for A.Y. 2021-22
Particulars Amount in `
Computation of GAV
Step 1 Compute ER
Higher of MV of ` 2,50,000 p.a. & FR of ` 2,00,000 2,10,000
p.a., but restricted to SR of ` 2,10,000 p.a.
Step 2 Compute Actual rent received/ receivable
Actual rent received/ receivable for let out
period less unrealized rent as per Rule 4 = 1,80,000
` 2,00,000 – ` 20,000
Step 3 Compare ER & Actual rent received/ receivable
Step 4 In this case the actual rent of ` 1,80,000 is
lower than ER of ` 2,10,000 owing to vacancy,
since, had the property not been vacant the 1,80,000
actual rent would have been ` 2,20,000
(` 1,80,000 + ` 40,000, being notional rent for
February and March 2020). Therefore, actual
rent is the GAV.
Gross Annual Value (GAV) 1,80,000
Less: Municipal taxes (paid by the owner during the
previous year) = 8% of ` 2,50,000 20,000
Net Annual Value (NAV) 1,60,000
Less: Deductions under section 24
(a) 30% of NAV = 30% of ` 1,60,000 48,000
(b) Interest on borrowed capital (actual
without any ceiling limit) 65,000 1,13,000
Income from house property 47,000
Note – Alternatively, if as per income-tax returns, unrealized rent is deducted from
GAV, then GAV would be ` 2,00,000, being the actual rent, since the actual rent is
lower than the expected rent of ` 2,10,000 owing to vacancy. Thereafter, unrealized
rent of ` 20,000 and municipal taxes of ` 20,000 would be deducted from GAV of
` 2,00,000 to arrive at the NAV of ` 1,60,000.

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(III) SELF-OCCUPIED PROPERTIES OR UNOCCUPIED PROPERTIES

Particulars Amount
Annual value under section 23(2) Nil
Less: Deduction under section 24
Interest on borrowed capital E
(i) Interest on loan taken for acquisition or construction
of house on or after 1.4.99 and same was completed
within 5 years from the end of the financial year in
which capital was borrowed, interest paid or payable
in toto for one or two self-occupied properties subject
to a maximum of ` 2,00,000 (including apportioned
pre-construction interest).
(ii) In case of loan for acquisition or construction taken
prior to 1.4.99 or loan taken for repair, renovation or
reconstruction at any point of time, interest paid or
payable in toto for one or two self-occupied properties
subject to a maximum of ` 30,000.
Income from house property -E
However, aggregate interest on borrowed capital allowable under
(i) and (ii) cannot exceed ` 2,00,000

ILLUSTRATION 6
Poorna has one house property at Indira Nagar in Bangalore. She stays with her
family in the house. The rent of similar property in the neighbourhood is ` 25,000
p.m. The municipal valuation is ` 2,80,000 p.a.. Municipal taxes paid is ` 8,000. The
house construction began in April 2014 with a loan of ` 20,00,000 taken from SBI
Housing Finance Ltd. @9% p.a. on 1.4.2014. The construction was completed on
30.11.2016. The accumulated interest up to 31.3.2016 is ` 3,60,000. On 31.3.2021,
Poorna paid ` 2,40,000 which included ` 1,80,000 as interest. There was no principal
repayment prior to this date. Compute Poorna’s income from house property for A.Y.
2021-22.

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SOLUTION
Computation of income from house property of Smt. Poorna for
A.Y. 2021-22

Particulars Amount `
Annual Value of house used for self-occupation under Nil
section 23(2)
Less: Deduction under section 24
Interest on borrowed capital
Interest on loan was taken for construction of house on
or after 1.4.99 and same was completed within the
prescribed time - interest paid or payable subject to a
maximum of ` 2,00,000 (including apportioned pre-
construction interest) will be allowed as deduction.
In this case the total interest is ` 1,80,000 + ` 72,000
(Being 1/5th of ` 3,60,000) = ` 2,52,000. However, the
interest deduction is restricted to ` 2,00,000. 2,00,000
Loss from house property (2,00,000)

(IV) HOUSE PROPERTY LET-OUT FOR PART OF THE YEAR AND SELF-
OCCUPIED FOR PART OF THE YEAR

Particulars Amount
Computation of GAV
Step 1 Compute ER for the whole year
ER = Higher of MV and FR, but restricted to SR
Step 2 Compute Actual rent received/ receivable
Actual rent received/ receivable for the period let out less
unrealized rent as per Rule 4 [See Note below for
alternate view]
Step 3 Compare ER for the whole year with the actual rent
received/ receivable for the let out period
Step 4 GAV is the higher of ER computed for the whole year and
Actual rent received/ receivable computed for the let-out
period
Gross Annual Value (GAV) A

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Less: Municipal taxes (paid by the owner during the previous B

year)
Net Annual Value (NAV) = (A-B) C
Less: Deductions under section 24
(a) 30% of NAV D
(b) Interest on borrowed capital (actual without
any ceiling limit) E F
Income from house property (C-F) G

Note - The income-tax returns, however, permit deduction of unrealized rent from
gross annual value. If this view is taken, the unrealized rent should be deducted only
after computing gross annual value.

ILLUSTRATION 7
Smt. Rajalakshmi owns a house property at Adyar in Chennai. The municipal value
of the property is ` 5,00,000, fair rent is ` 4,20,000 and standard rent is
` 4,80,000. The property was let-out for ` 50,000 p.m. up to December 2020.
Thereafter, the tenant vacated the property and Smt. Rajalakshmi used the house
for self-occupation. Rent for the months of November and December 2020 could
not be realised in spite of the owner’s efforts. All the conditions prescribed under
Rule 4 are satisfied. She paid municipal taxes @12% during the year. She had paid
interest of ` 25,000 during the year for amount borrowed for repairs for the house
property. Compute her income from house property for the A.Y. 2021-22.
SOLUTION
Computation of income from house property of Smt. Rajalakshmi for A.Y. 2021-22

Particulars Amount in `
Computation of GAV
Step 1 Compute ER for the whole year
ER = Higher of MV of ` 5,00,000 and FR of
` 4,20,000, but restricted to SR of ` 4,80,000 4,80,000
Step 2 Compute Actual rent received/ receivable
Actual rent received/receivable for the period let
out less unrealized rent as per Rule 4 = (` 50,000 3,50,000
× 9) - (` 50,000 × 2) = ` 4,50,000 - ` 1,00,000

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Step 3 Compare ER for the whole year with the actual

rent received/ receivable for the let out period
i.e. ` 4,80,000 and ` 3,50,000
Step 4 GAV is the higher of ER computed for the
whole year and Actual rent received/ receivable 4,80,000
computed for the let-out period
Gross Annual Value (GAV) 4,80,000
Less: Municipal taxes (paid by the owner during the
previous year) = 12% of ` 5,00,000 60,000
Net Annual Value (NAV) 4,20,000
Less: Deductions under section 24
(a) 30% of NAV = 30% of ` 4,20,000 1,26,000
(b) Interest on borrowed capital 25,000 1,51,000
Income from house property 2,69,000

Note – Alternatively, if as per income-tax returns, unrealized rent is deducted from

GAV, then GAV would be ` 4,80,000, being higher of expected rent of ` 4,80,000 and
actual rent of ` 4,50,000. Thereafter, unrealized rent of ` 1,00,000 and municipal
taxes of ` 60,000 would be deducted from GAV of ` 4,80,000 to arrive at the NAV of
` 3,20,000. The deduction u/s 24(a) would be ` 96,000, being 30% of ` 3,20,000. The
income from house property would, therefore, be ` 1,99,000.
(V) DEEMED TO BE LET OUT PROPERTY

Particulars Amount
Gross Annual Value (GAV) A
ER is the GAV of house property
ER = Higher of MV and FR, but restricted to SR
Less: Municipal taxes (paid by the owner during the previous year) B
Net Annual Value (NAV) = (A-B) C
Less: Deductions under section 24
(a) 30% of NAV D
(b) Interest on borrowed capital (actual without
any ceiling limit) E F
Income from house property (C-F) G

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ILLUSTRATION 8
Ganesh has three houses, all of which are self-occupied. The particulars of the houses for
the P.Y. 2020-21 are as under:

Particulars House I House II House III

Municipal valuation p.a. ` 3,00,000 ` 3,60,000 ` 3,30,000
Fair rent p.a. ` 3,75,000 ` 2,75,000 ` 3,80,000
Standard rent p.a. ` 3,50,000 ` 3,70,000 ` 3,75,000
Date of completion/purchase 31.3.1999 31.3.2001 01.4.2014
Municipal taxes paid during the year 12% 8% 6%
Interest on money borrowed for repair of - 55,000
property during the current year
Interest for current year on money 1,75,000
borrowed in July 2014 for purchase of
property

Compute Ganesh’s income from house property for A.Y.2021-22 and suggest which
houses should be opted by Ganesh to be assessed as self-occupied so that his tax liability
is minimum.

SOLUTION
Let us first calculate the income from each house property assuming that they are
deemed to be let out.
Computation of income from house property of Ganesh for the A.Y. 2021-22

Particulars Amount in `
House I House II House III
Gross Annual Value (GAV)
ER is the GAV of house property
ER = Higher of MV and FR, but 3,50,000 3,60,000 3,75,000
restricted to SR
Less: Municipal taxes (paid by the 36,000 28,800 19,800
owner during the previous year)
Net Annual Value (NAV) 3,14,000 3,31,200 3,55,200

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 INCOME FROM HOUSE PROPERTY 4.141

Less: Deductions under section 24

(a) 30% of NAV 94,200 99,360 1,06,560
(b) Interest on borrowed capital - 55,000 1,75,000
Income from house property 2,19,800 1,76,840 73,640

Ganesh can opt to treat any two of the above house properties as self-occupied .
OPTION 1 (House I and II– self-occupied and House III – deemed to be let out)
If House I and II are opted to be self-occupied, the income from house property shall
be –
Particulars Amount in `
House I (Self-occupied) Nil
House II (Self-occupied) (interest deduction restricted to (30,000)
` 30,000)
House III (Deemed to be let-out) 73,640
Income from house property 43,640

OPTION 2 (House I and III – self-occupied and House II – deemed to be let out)
If House I and III are opted to be self-occupied, the income from house property shall
be –
Particulars Amount in `
House I (Self-occupied) Nil
House II (Deemed to be let-out) 1,76,840
House III (Self-occupied) (1,75,000)
Income from house property 1,840

OPTION 3 (House II and III – self-occupied and House I – deemed to be let out)
If House II and III are opted to be self-occupied, the income from house property shall
be –
Particulars Amount in `
House I (Deemed to be let-out) 2,19,800
House II (Self-occupied) (interest deduction (30,000)
restricted to ` 30,000)

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House III (Self-occupied) (1,75,000)

(Total interest deduction restricted to ` 2,00,000) (2,00,000)
Income from house property 19,800

Since Option 2 is most beneficial, Ganesh should opt to treat House I and III as self-
occupied and House II as deemed to be let out. His income from house property
would be ` 1,840 for the A.Y. 2021-22.
(VI) HOUSE PROPERTY, A PORTION LET OUT AND A PORTION SELF-
OCCUPIED
ILLUSTRATION 9
Prem owns a house in Madras. During the previous year 2020-21, 2/3rd portion of the
house was self-occupied and 1/3rd portion was let out for residential purposes at a
rent of ` 8,000 p.m. Municipal value of the property is ` 3,00,000 p.a., fair rent is
` 2,70,000 p.a. and standard rent is ` 3,30,000 p.a. He paid municipal taxes @10%
of municipal value during the year. A loan of ` 25,00,000 was taken by him during
the year 2016 for acquiring the property. Interest on loan paid during the previous
year 2020-21 was ` 1,20,000. Compute Prem’s income from house property for the
A.Y. 2021-22.
SOLUTION
There are two units of the house. Unit I with 2/3rd area is used by Prem for self-
occupation throughout the year and no other benefit is derived from that unit,
hence it will be treated as self-occupied and its annual value will be Nil. Unit 2 with
1/3rd area is let-out throughout the previous year and its annual value has to be
determined as per section 23(1).
Computation of income from house property of Mr. Prem for A.Y. 2021-22

Particulars Amount in `
Unit I (2/3rd area – self-occupied)
Annual Value Nil
Less: Deduction under section 24(b)
2/3rd of ` 1,20,000 80,000
Income from Unit I (self-occupied) (80,000)

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 INCOME FROM HOUSE PROPERTY 4.143

Unit II (1/3rd area – let out)

Computation of GAV
Step I Compute ER
ER = Higher of MV and FR, restricted to SR 1,00,000
However, in this case, SR of ` 1,10,000 (1/3 of rd

` 3,30,000) is more than the higher of MV of

` 1,00,000 (1/3rd of ` 3,00,000) and FR of
` 90,000 (1/3rd of ` 2,70,000). Hence the higher
of MV and FR is the ER. In this case, it is the MV.
Step 2 Compute actual rent received/ receivable
` 8,000×12 = ` 96,000 96,000
Step 3 Compare ER and Actual rent received/
receivable
Step 4 GAV is the higher of ER and actual rent
received/ receivable i.e. higher of ` 1,00,000 1,00,000
and ` 96,000
Gross Annual Value(GAV) 1,00,000
Less: Municipal taxes paid by the owner during the
previous year relating to let-out portion
1/3rd of (10% of ` 3,00,000) = ` 30,000/3 =
`10,000 10,000
Net Annual Value(NAV) 90,000
Less: Deductions under section 24
(a) 30% of NAV = 30% of ` 90,000 27,000
(b) Interest paid on borrowed capital (relating
to let out portion)
1/3rd of ` 1,20,000 40,000 67,000
Income from Unit II (let-out) 23,000
Loss under the head “Income from house property” = (` 80,000) + ` 23,000
= (` 57,000)

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2.8 INADMISSIBLE DEDUCTIONS [SECTION 25]

Interest chargeable under this Act which is payable outside India shall not be
deducted if –
(a) tax has not been paid or deducted from such interest and
(b) in respect of which there is no person in India who may be treated as an agent 3.

2.9 PROVISION FOR ARREARS OF RENT AND

UNREALIZED RENT RECEIVED
SUBSEQUENTLY [SECTION 25A]
(i) As per section 25A(1), the amount of rent received in arrears from a tenant or
the amount of unrealised rent realised subsequently from a tenant by an
assessee shall be deemed to be income from house property in the financial
year in which such rent is received or realised, and shall be included in the
total income of the assessee under the head “Income from house property”,
whether the assessee is the owner of the property or not in that financial year.
(ii) Section 25A(2) provides a deduction of 30% of arrears of rent or unrealised
rent realised subsequently by the assessee.
(iii) Summary:

Section 25A
Arrears of Rent / Unrealised Rent
(i) Taxable in the year of receipt/ realisation
(ii) Deduction@30% of rent received/ realised
(iii) Taxable even if assessee is not the owner of the property in the
financial year of receipt/ realisation.

ILLUSTRATION 10
Mr. Anand sold his residential house property in March, 2020.
In June, 2020, he recovered rent of ` 10,000 from Mr. Gaurav, to whom he had let
out his house for two years from April 2014 to March 2016. He could not realise two

3
under section 163

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 INCOME FROM HOUSE PROPERTY 4.145

months rent of ` 20,000 from him and to that extent his actual rent was reduced
while computing income from house property for A.Y.2016-17.
Further, he had let out his property from April, 2016 to February, 2020 to Mr. Satish.
In April, 2018, he had increased the rent from ` 12,000 to ` 15,000 per month and
the same was a subject matter of dispute. In September, 2020, the matter was finally
settled and Mr. Anand received ` 69,000 as arrears of rent for the period April 2018
to February, 2020.
Would the recovery of unrealised rent and arrears of rent be taxable in the hands of
Mr. Anand, and if so in which year?
SOLUTION
Since the unrealised rent was recovered in the P.Y. 2020-21, the same would be
taxable in the A.Y. 2021-22 under section 25A, irrespective of the fact that Mr.
Anand was not the owner of the house in that year. Further, the arrears of rent was
also received in the P.Y. 2020-21, and hence the same would be taxable in the A.Y.
2021-22 under section 25A, even though Mr. Anand was not the owner of the house
in that year. A deduction of 30% of unrealised rent recovered and arrears of rent
would be allowed while computing income from house property of
Mr. Anand for A.Y. 2021-22.
Computation of income from house property of Mr. Anand for A.Y. 2021-22
Particulars `
(i) Unrealised rent recovered 10,000
(ii) Arrears of rent received 69,000
79,000
Less: Deduction@30% 23,700
Income from house property 55,300

2.10 TREATMENT OF INCOME FROM CO-

OWNED PROPERTY [SECTION 26]
(i) Where property is owned by two or more persons, whose shares are definite
and ascertainable, then the income from such property cannot be taxed as
income of an AOP.
(ii) The share income of each such co-owner should be determined in accordance
with sections 22 to 25 and included in his individual assessment.

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(iii) Where the house property owned by co-owners is self occupied by each of the
co-owners, the annual value of the property of each co-owner will be Nil and
each co-owner shall be entitled to a deduction of ` 30,000 / ` 2,00,000, as the
case may be, under section 24(b) on account of interest on borrowed capital.
However, the aggregate deduction of interest to each co-owner in respect of
interest payable on loan taken for co-owned house property and interest, if
any, payable on loan taken for another self-occupied property owned by him
cannot exceed ` 30,000/ ` 2,00,000, as the case may be.
(iv) Where the house property owned by co-owners is let out, the income from
such property shall be computed as if the property is owned by one owner and
thereafter the income so computed shall be apportioned amongst each co-
owner as per their specific share.
(v) Summary:
Co-owned property [Section 26]
Self-occupied property Let-out property
The annual value of the property of each The income from such
co-owner will be Nil and each co-owner property shall be computed as
shall be entitled to a deduction of if the property is owned by
` 30,000/ ` 2,00,000, as the case may be,one owner and thereafter the
on account of interest on borrowed income so computed shall be
capital. apportioned amongst each
However, if the co-owner owns another co-owner as per their specific
self-occupied / unoccupied property, the share.
aggregate interest from the co-owned
property and the other self-occupied
property cannot exceed ` 30,000/
` 2,00,000, as the case may be.

ILLUSTRATION 11
Ms. Aparna co-owns a residential house property in Calcutta along with her sister
Ms. Dimple, where her sister’s family resides. Both of them have equal share in
the property and the same is used by them for self-occupation. Interest is payable
in respect of loan of ` 50,00,000@10% taken on 1.4.2019 for acquisition of such
property. In addition, Ms. Aparna owns a flat in Pune in which she and her parents
reside. She has taken a loan of ` 3,00,000@12% on 1.10.2019 for repairs of this

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flat. Compute the deduction which would be available to Ms. Aparna and
Ms. Dimple under section 24(b) for A.Y.2021-22.
SOLUTION
Computation of deduction u/s 24(b) available to Ms. Aparna for A.Y.2021-22

Particulars `
I Interest on loan taken for acquisition of residential house
property at Calcutta
` 50,00,000 x 10% = ` 5,00,000
Ms. Aparna’s share = 50% of ` 5,00,000 = ` 2,50,000
Restricted to ` 2,00,000 2,00,000
II Interest on loan taken for repair of flat at Pune
` 3,00,000 x 12% = ` 36,000
Restricted to ` 30,000 30,000
Total interest 2,30,000
Deduction under section 24(b) in respect of (I) and (II) above to be 2,00,000
restricted to
Computation of deduction u/s 24(b) available to Ms. Dimple for A.Y.2021-22
Particulars `

Interest on loan taken for acquisition of residential house property

at Calcutta
` 50,00,000 x 10% = ` 5,00,000
Ms. Dimple’s share = 50% of ` 5,00,000 = ` 2,50,000
Restricted to ` 2,00,000 2,00,000
Deduction under section 24(b) 2,00,000

2.11 DEEMED OWNERSHIP [SECTION 27]

As per section 27, the following persons, though not legal owners of a property,
are deemed to be the owners for the purposes of section 22 to 26.
(i) Transfer to a spouse [Section 27(i)] – In case of transfer of house property
by an individual to his or her spouse otherwise than for adequate

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consideration, the transferor is deemed to be the owner of the transferred

property.
Exception – In case of transfer to spouse in connection with an agreement to
live apart, the transferor will not be deemed to be the owner. The transferee
will be the owner of the house property.
(ii) Transfer to a minor child [Section 27(i)] – In case of transfer of house
property by an individual to his or her minor child otherwise than for
adequate consideration, the transferor would be deemed to be owner of the
house property transferred.
Exception – In case of transfer to a minor married daughter, the transferor is
not deemed to be the owner.
Note - Where cash is transferred to spouse/minor child and the transferee
acquires property out of such cash, then, the transferor shall not be treated as
deemed owner of the property. However, clubbing provisions will be attracted.
(iii) Holder of an impartible estate [Section 27(ii)] – The impartible estate is a
property which is not legally divisible. The holder of an impartible estate shall be
deemed to be the individual owner of all properties comprised in the estate.
After enactment of the Hindu Succession Act, 1956, all the properties
comprised in an impartible estate by custom is to be assessed in the status
of a HUF. However, section 27(ii) will continue to be applicable in relation to
impartible estates by grant or covenant.
(iv) Member of a co-operative society etc. [Section 27(iii)] – A member of a
co-operative society, company or other association of persons to whom a
building or part thereof is allotted or leased under a House Building Scheme
of a society/ company/ association, shall be deemed to be owner of that
building or part thereof allotted to him although the co-operative society/
company/ association is the legal owner of that building.
(v) Person in possession of a property [Section 27(iiia)] – A person who is
allowed to take or retain the possession of any building or part thereof in part
performance of a contract of the nature referred to in section 53A of the
Transfer of Property Act shall be the deemed owner of that house property.
This would include cases where the –
(1) possession of property has been handed over to the buyer

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(2) sale consideration has been paid or promised to be paid to the seller
by the buyer
(3) sale deed has not been executed in favour of the buyer, although
certain other documents like power of attorney/ agreement to sell/ will
etc. have been executed.
In all the above cases, the buyer would be deemed to be the owner of the
property although it is not registered in his name.
(vi) Person having right in a property for a period not less than 12 years
[Section 27(iiib)] – A person who acquires any rights in or with respect to
any building or part thereof, by virtue of any transaction as is referred to in
section 269UA(f) i.e. transfer by way of lease for not less than 12 years, shall
be deemed to be the owner of that building or part thereof.
Exception – In case the person acquiring any rights by way of lease from month
to month or for a period not exceeding one year, such person will not be deemed
to be the owner.

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LET US RECAPITULATE
Section Contents

22 Basis of Charge
The annual value of any property comprising of buildings or lands
appurtenant thereto, of which the assessee is the owner, is
chargeable to tax under the head “Income from house property”.

(i) Property should consist of any buildings or lands

appurtenant thereto
Income from letting out of vacant land is, however, taxable
under the head “Income from other sources” or “Profits and
gains from business or profession”, as the case may be.

(ii) Assessee must be the owner of the property

(iii) The property may be used for any purpose, but it should not
be used by the owner for the purpose of any business or
profession carried on by him, the profit of which is
chargeable to tax.
Further, the income earned by an assessee engaged in the
business of letting out of properties on rent would be taxable
as business income.

(iv) Property held as stock-in-trade etc.

Annual value of house property will be charged under the
head “Income from house property”, where it is held by the
assessee as stock-in-trade of a business also.

23(1) Annual Value of let-out property

Annual value is the amount arrived after deducting the municipal
taxes actually paid by the owner during the previous year from the
Gross Annual Value (GAV). The GAV of Let-out property would be
determined in the following manner:

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Step 1: Compare fair rent with municipal value

whichever is higher

Step 2: Compare step 1 value with standard rent

whichever is lower is the Expected Rent

Compare the Expected rent determined

Step 3 above with actual rent

Actual rent > Actual rent <

Expected Rent Expected Rent

Actual rent < Actual rent <

Actual rent Expected Expected Rent
is GAV Rent because because of any
of vacancy other reason

Expected Rent
is GAV

23(2) Annual Value of self-occupied property

Where the property is self-occupied for own residence or unoccupied
throughout the previous year owing to his employment, business or
profession carried on at any other place and residing at that other
place in a building not belonging to him, its Annual Value will be Nil,
provided no other benefit is derived by the owner from such property.
An assessee can claim benefit of Nil Annual Value in respect of one or
two residential house properties self-occupied by him.

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 4.152 INCOME TAX LAW

23(4) Annual Value of deemed to be let-out property

If more than two properties are so self-occupied/unoccupied, the
assessee may claim benefit of Nil annual value in respect of any two
properties at his option. The other property(s) would be deemed to
be let out, in respect of which Expected Rent would be the GAV.
23(5) Annual value where the property held as stock-in-trade etc.
Where property consisting of any buildings or lands appurtenant
thereto is held as stock-in-trade and the whole or any part of the
property is not let out during the whole or any part of the previous
year, the annual value of such property or part of the property for the
period upto 2 years from the end of the financial year in which
certificate of completion of construction of the property is obtained
from the competent authority shall be taken as “Nil”.
24 Deductions from Annual Value
1. 30% of Annual Value [Section 24(a)]
2. Interest on borrowed capital [Section 24(b)]: Interest payable on
loans borrowed for the purpose of acquisition, construction,
repairs, renewal or reconstruction can be claimed as deduction.
Pre-construction interest: Interest for the period prior to the
previous year in which property is acquired or construction is
completed.
Pre-construction interest is allowable as deduction in 5 equal
installments from the previous year of completion of construction or
acquisition.
(a) Let out property: Whole of the amount of interest on borrowed
capital payable during the previous year and apportioned pre-
construction interest without any ceiling limit would be allowed
as deduction.
(b) Self-occupied property:
(i) Loan taken on or after 1.4.99: Interest on loan taken for acquisition
or construction of house on or after 1.4.99, where such construction
is completed within 5 years from the end of the financial year in
which capital was borrowed, aggregate interest paid or payable for
one or two self-occupied properties subject to a maximum of
` 2,00,000 (including apportioned pre-construction interest).

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 INCOME FROM HOUSE PROPERTY 4.153

(ii) Loan taken before 1.4.99: In case of loan for acquisition or

construction taken prior to 1.4.99 or loan taken for repair,
renovation or reconstruction at any point of time, aggregate
interest paid or payable for one or two self-occupied properties
subject to a maximum of ` 30,000 (including apportioned pre-
construction interest).
Note - Total amount of interest deduction under (i) and (i) in
respect of one or two self-occupied properties owned by the
assessee cannot exceed ` 2,00,000.
25 Inadmissible deductions
Interest chargeable under this Act which is payable outside India shall
not be deducted if –
(a) tax has not been paid or deducted from such interest and
(b) in respect of which there is no person in India who may be treated
as an agent
25A Taxability of recovery of unrealised rent & arrears of rent received
(i) Taxable in the year of receipt/ realisation
(ii) Deduction@30% of rent received/ realised
(iii) Taxable even if assessee is not the owner of the property in the
financial year of receipt/ realization
26 Co-owned property
(i) Self-occupied property: The annual value of the property of each
co-owner will be Nil and each co-owner shall be entitled to a
deduction of ` 30,000 / ` 2,00,000, as the case may be, on account
of interest on borrowed capital.
However, aggregate deduction of interest to each co-owner in
respect of co-owned self-occupied property and any other self-
occupied house property, if any, cannot exceed ` 30,000/
` 2,00,000, as the case may be.
(ii) Let-out property: The income from such property shall be
computed as if the property is owned by one owner and thereafter
the income so computed shall be apportioned amongst each co-
owner as per their specific share.

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 4.154 INCOME TAX LAW

27 Deemed Ownership: The following persons, though not legal owners

of a property, are deemed to be the owners:
(i) Transferor of the property, where the property is transferred to
the spouse or to minor child except minor married daughter,
without adequate consideration
(ii) Holder of an impartible estate
(iii) Member of a co-operative society etc.
(iv) Person in possession of a property
(v) Person having right in a property for a period not less than 12
years
Other important points
(i) The Actual rent received/receivable should not include any amount of
rent which is not capable of being realized i.e., unrealized rent while
determining gross annual value in case let-out property, provided the
conditions specified in Rule 4 are satisfied.
Note - The income-tax returns, however, permit deduction of unrealized
rent from gross annual value. If this view is taken, the unrealized rent
should be deducted only after computing gross annual value.
(ii) If a portion of a property is let-out and a portion is self-occupied, then,
the income will be computed separately for let out and self occupied
portion.

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 INCOME FROM HOUSE PROPERTY 4.155

TEST YOUR KNOWLEDGE

Question 1
Mr. Raman is a co-owner of a house property along with his brother holding equal
share in the property.
Particulars `
Municipal value of the property 1,60,000
Fair rent 1,50,000
Standard rent under the Rent Control Act 1,70,000
Rent received 15,000 p.m.
The loan for the construction of this property is jointly taken and the interest charged
by the bank is ` 25,000, out of which ` 21,000 has been paid. Interest on the unpaid
interest is ` 450. To repay this loan, Raman and his brother have taken a fresh loan
and interest charged on this loan is ` 5,000.
The municipal taxes of ` 5,100 have been paid by the tenant.
Compute the income from this property chargeable in the hands of Mr. Raman for
the A.Y. 2021-22.
Answer
Computation of income from house property of Mr. Raman for A.Y. 2021-22

Particulars ` `
Gross Annual Value (See Note 1 below) 1,80,000
Less: Municipal taxes – paid by the tenant, hence not
deductible Nil
Net Annual Value (NAV) 1,80,000
Less: Deductions under section 24
(i) 30% of NAV 54,000
(ii) Interest on housing loan (See Note 2 below)
- Interest on loan taken from bank 25,000
- Interest on fresh loan to repay old loan for this
property 5,000 84,000
Income from house property 96,000
50% share taxable in the hands of Mr. Raman (See Note 3
below) 48,000

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 4.156 INCOME TAX LAW

Notes:
1. Computation of Gross Annual Value (GAV)
GAV is the higher of Expected rent and actual rent received. Expected rent is
the higher of municipal value and fair rent, but restricted to standard rent.

Particulars ` ` ` `
(a) Municipal value of property 1,60,000
(b) Fair rent 1,50,000
(c) Higher of (a) and (b) 1,60,000
(d) Standard rent 1,70,000
(e) Expected rent [lower of (c) 1,60,000
and (d)]
(f) Actual rent [` 15,000 x 12] 1,80,000
(g) Gross Annual Value [higher 1,80,000
of (e)and (f)]

2. Interest on housing loan is allowable as a deduction under section 24 on

accrual basis. Further, interest on fresh loan taken to repay old loan is also
allowable as deduction. However, interest on unpaid interest is not allowable
as deduction under section 24.
3. Section 26 provides that where a house property is owned by two or more
persons whose shares are definite and ascertainable, the share of each such
person in the income of house property, as computed in accordance with
sections 22 to 25, shall be included in his respective total income. Therefore,
50% of the total income from the house property is taxable in the hands of
Mr. Raman since he is an equal owner of the property.
Question 2
Mr. X owns one residential house in Mumbai. The house is having two identical units.
First unit of the house is self-occupied by Mr. X and another unit is rented for ` 8,000
p.m. The rented unit was vacant for 2 months during the year. The particulars of the
house for the previous year 2020-21 are as under:
Standard rent ` 1,62,000 p.a.
Municipal valuation ` 1,90,000 p.a.
Fair rent ` 1,85,000 p. a

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Municipal tax (Paid by Mr. X) 15% of municipal valuation

Light and water charges ` 500 p.m.
Interest on borrowed capital ` 1,500 p.m.
Lease money ` 1,200 p.a.
Insurance charges ` 3,000 p.a.
Repairs ` 12,000 p.a.
Compute income from house property of Mr. X for the A.Y. 2021-22.
Answer
Computation of Income from house property for A.Y. 2021-22
Particulars ` `
(A) Rented unit (50% of total area – See Note below)
Step I - Computation of Expected Rent
Municipal valuation (` 1,90,000 x ½) 95,000
Fair rent (` 1,85,000 x ½) 92,500
Standard rent (` 1,62,000 x ½) 81,000
Expected Rent is higher of municipal valuation and 81,000
fair rent, but restricted to standard rent
Step II - Actual Rent
Rent receivable for the whole year (` 8,000 x 12) 96,000
Step III – Computation of Gross Annual Value
Actual rent received owing to vacancy (` 96,000 – 80,000
` 16,000)
Since, owing to vacancy, the actual rent received is
lower than the Expected Rent, the actual rent
received is the Gross Annual Value
Gross Annual Value 80,000
Less: Municipal taxes (15% of ` 95,000) 14,250
Net Annual value 65,750
Less : Deductions under section 24 -
(i) 30% of net annual value 19,725

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 4.158 INCOME TAX LAW

(ii) Interest on borrowed capital (` 750 x 12) 9,000 28,725

Taxable income from let out portion 37,025
(B) Self occupied unit (50% of total area – See Note
below)
Annual value Nil
Less : Deduction under section 24 -
Interest on borrowed capital (` 750 x 12) 9,000 9,000
Loss from self occupied portion (9,000)
Income from house property 28,025

Note: No deduction will be allowed separately for light and water charges, lease
money paid, insurance charges and repairs.
Question 3
Mr. Vikas owns a house property whose Municipal Value, Fair Rent and Standard Rent
are ` 96,000, ` 1,26,000 and ` 1,08,000 (per annum), respectively.
During the Financial Year 2020-21, one-third of the portion of the house was let out
for residential purpose at a monthly rent of ` 5,000. The remaining two-third portion
was self-occupied by him. Municipal tax @ 11 % of municipal value was paid during
the year.
The construction of the house began in June, 2013 and was completed on 31-5-2016.
Vikas took a loan of ` 1,00,000 on 1-7-2013 for the construction of building.
He paid interest on loan @ 12% per annum and every month such interest was paid.
Compute income from house property of Mr. Vikas for the Assessment Year 2021-22.
Answer
Computation of income from house property of Mr. Vikas for the
A.Y. 2021-22
Particulars ` `
Income from house property
I. Self-occupied portion (Two third)
Net Annual value Nil
Less: Deduction under section 24(b)

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 INCOME FROM HOUSE PROPERTY 4.159

Interest on loan (See Note

below) (` 18,600 x 2/3) 12,400
Loss from self occupied property (12,400)
II. Let-out portion (One third)
Gross Annual Value
(a) Actual rent received (` 5,000 x 12) ` 60,000
(b) Expected rent ` 36,000
[higher of municipal valuation (i.e.,
` 96,000) and fair rent (i.e., ` 1,26,000)
but restricted to standard rent (i.e.,
` 1,08,000)] = ` 1,08,000 x 1/3
Higher of (a) or (b) 60,000
Less: Municipal taxes (` 96,000 x 11% x
1/3) 3,520
Net Annual Value 56,480
Less: Deductions under section 24
(a) 30% of NAV 16,944
(b) Interest on loan (See Note
below) (` 18,600 x 1/3) 6,200 33,336
Income from house property 20,936
Note: Interest on loan taken for construction of building
Interest for the year (1.4.2020 to 31.3.2021) = 12% of ` 1,00,000 = ` 12,000
Pre-construction period interest = 12% of ` 1,00,000 for 33 months (from 1.07.2013 to
31.3.2016) = ` 33,000
Pre-construction period interest to be allowed in 5 equal annual installments of
` 6,600 from the year of completion of construction i.e. from F.Y. 2016-17 till
F.Y. 2020-21.
Therefore, total interest deduction under section 24 = ` 12,000 + ` 6,600 = ` 18,600.
Question 4
Mrs. Rohini Ravi, a citizen of the U.S.A., is a resident and ordinarily resident in India
during the financial year 2020-21. She owns a house property at Los Angeles, U.S.A.,
which is used as her residence. The annual value of the house is $ 20,000. The value
of one USD ($) may be taken as ` 75.

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She took ownership and possession of a flat in Chennai on 1.7.2020, which is used
for self-occupation, while she is in India. The flat was used by her for 7 months only
during the year ended 31.3.2021. The municipal valuation is ` 3,84,000 p.a. and the
fair rent is ` 4,20,000 p.a. She paid the following to Corporation of Chennai:
Property Tax ` 16,200
Sewerage Tax ` 1,800
She had taken a loan from Standard Chartered Bank in June, 2018 for purchasing
this flat. Interest on loan was as under:

Particulars `

Period prior to 1.4.2020 49,200

1.4.2020 to 30.6.2020 50,800

1.7.2020 to 31.3.2021 1,31,300

She had a house property in Bangalore, which was sold in March, 2017. In respect of
this house, she received arrears of rent of ` 60,000 in March, 2021. This amount has
not been charged to tax earlier.
Compute the income chargeable from house property of Mrs. Rohini Ravi for the
assessment year 2021-22.
Answer
Since the assessee is a resident and ordinarily resident in India, her global income
would form part of her total income i.e., income earned in India as well as outside
India will form part of her total income.
She possesses a self-occupied house at Los Angeles as well as at Chennai. She can
take the benefit of “Nil” Annual Value in respect of both the house properties.
As regards the Bangalore house, arrears of rent will be chargeable to tax as income
from house property in the year of receipt under section 25A. It is not essential that
the assessee should continue to be the owner. 30% of the arrears of rent shall be
allowed as deduction.

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Accordingly, the income from house property of Mrs. Rohini Ravi for A.Y.2021-22
will be calculated as under:

Particulars ` `
1. Self-occupied house at Los Angeles
Annual value Nil
Less: Deduction under section 24 Nil
Chargeable income from this house property Nil
2. Deemed let out house property at Chennai
Annual value Nil
Less: Deduction under section 24
Interest on borrowed capital (See Note 1,91,940
below)
(1,91,940)
3. Arrears in respect of Bangalore property
(Section 25A)
Arrears of rent received 60,000
Less: Deduction @ 30% u/s 25A(2) 18,000 42,000
Loss under the head "Income from house property” (1,49,940)

Note: Interest on borrowed capital

Particulars `

Interest for the current year (` 50,800 + ` 1,31,300) 1,82,100

Add: 1/5th of pre-construction interest (` 49,200 x 1/5) 9,840
Interest deduction allowable under section 24 1,91,940

Question 5
Two brothers Arun and Bimal are co-owners of a house property with equal share.
The property was constructed during the financial year 1998-1999. The property
consists of eight identical units and is situated at Cochin.
During the financial year 2020-21, each co-owner occupied one unit for residence
and the balance of six units were let out at a rent of ` 12,000 per month per unit.
The municipal value of the house property is ` 9,00,000 and the municipal taxes

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 4.162 INCOME TAX LAW

are 20% of municipal value, which were paid during the year. The other expenses
were as follows:
`
(i) Repairs 40,000
(ii) Insurance premium (paid) 15,000
(iii) Interest payable on loan taken for construction of house 3,00,000
One of the let out units remained vacant for four months during the year.
Arun could not occupy his unit for six months as he was transferred to Chennai. He
does not own any other house.
The other income of Mr. Arun and Mr. Bimal are ` 2,90,000 and ` 1,80,000,
respectively, for the financial year 2020-21.
Compute the income under the head ‘Income from House Property’ and the total
income of two brothers for the assessment year 2021-22.
Answer
Computation of total income for the A.Y. 2021-22
Particulars Arun (`) Bimal (`)
Income from house property
I. Self-occupied portion (25%)
Annual value Nil Nil
Less: Deduction under section 24(b)
Interest on loan taken for construction
` 37,500 (being 25% of ` 1.5 lakh) restricted
to maximum of ` 30,000 for each co-owner 30,000 30,000
since the property was constructed before
1.04.1999. Hence, it is assumed that loan
was taken before 1.4.1999
Loss from self occupied property (30,000) (30,000)
II. Let-out portion (75%) – See Working Note
below 1,25,850 1,25,850
Income from house property 95,850 95,850
Other Income 2,90,000 1,80,000
Total Income 3,85,850 2,75,850

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Working Note – Computation of Income from Let-Out Portion of House Property

Particulars ` `
Let-out portion (75%)
Gross Annual Value
(a) Municipal value (75% of ` 9 lakh) 6,75,000
(b) Actual rent [(` 12000 x 6 x 12) – (` 12,000 x 1 x 4)] 8,16,000
= ` 8,64,000 - ` 48,000
- whichever is higher 8,16,000
Less: Municipal taxes 75% of ` 1,80,000 (20% of ` 9 1,35,000
lakh)
Net Annual Value (NAV) 6,81,000
Less: Deduction under section 24
(a) 30% of NAV 2,04,300
(b) Interest on loan taken for the house [75% of ` 3
lakh] 2,25,000 4,29,300
Income from let-out portion of house property 2,51,700
Share of each co-owner (50%) 1,25,850

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